Margaret
Hodge: I understood that; clearly we are not reaching each
other in our exchange. I have been passed a note that might be more
helpful. I have not read it myself. It says that creditors will not
have to wait for five years, if the company is
insolvent.
Mr.
Davies: It is not
insolvent.
Margaret
Hodge: If a loan is due two years after a company changes
its status to a limited company, the status of that loan will
change.
Mr.
Davies: What about four years after
that?
Margaret
Hodge: It does not matter—the point is that it is
after three years. At that point, although the status has of course
changed from unlimited to limited, there is still a loan against that
company. If the creditor does not receive the moneys due to him at that
point, he can seek to have the company wound up. I accept that that is
not the same comfort as with an unlimited company, but it is not like
the creditor has no comfort at
all.
Paul
Farrelly: I would like to raise a different point that
demonstrates why my right hon. Friend is absolutely right to resist the
Liberal Democrat amendments. Any good lawyer—the hon. Member for
Cambridge is an excellent lawyer—would wish to see at the end of
such an amendment, “such consent not to be unreasonably
withheld”. That is not
there. For example, a
good reason to move from being an unincorporated to a limited liability
company is to ease the path towards flotation. One reason to float on
the stock exchange might be to pay off loans or liabilities with
creditors. It is quite conceivable that a creditor who wished to have
part of the action from a flotation, but was denied it, could veto a
company’s progress and flotation. In those circumstances,
consent would have been “unreasonably withheld”. Those
words are not in the
amendments.
Margaret
Hodge: I agree entirely. I shall have one last go with the
advice that I have been given.
Let us imagine that a creditor,
described in the terms that the hon. Gentleman described, is concerned
that a limited company is unable to repay a loan. I am advised that
that creditor, within the three years in which they are covered by the
Insolvency Act 1986, could seek to have the company dissolved on the
basis that it could become insolvent by not meeting the loan repayment
terms. That might be the answer that the hon. Gentleman is looking for.
If not, we will have to settle the matter through
correspondence.
Mr.
Davies: May I ask the Minister for the reference to the
insolvency provision? Also, what criteria would need to be met for such
a petition to be
granted?
Margaret
Hodge: The provision is section 77 of the Insolvency Act
1986, and I am told that the criteria are as in any other case. I hope
that the hon. Gentleman is happy with that. He has raised a valid
point. He can write to me, and I will let hon. Members see it. We can
return to it on Report if there is something that we have
omitted.
Mr.
Davies: I am conscious, Mr. Illsley, that you have been
gracious in allowing me to intervene on the Minister on a number of
occasions. I hope that that exchange has been useful in clarifying the
issue. So as not to trespass too much on your patience, I thought that
I would make it clear where I am coming from.
The exchange with the Minister
has persuaded me not only that there is a problem but that it is
probably more important than I first envisaged, and it is not
adequately dealt with by the insolvency rules that she described. I
think that the Committee would agree that it is important to provide a
mechanism for companies to change their status from private to public
without undue burdens or hindrance. An instance has already been
mentioned of a company that wants to float. That is a sensible move,
but we simply want to provide the maximum flexibility. We want not to
inhibit but to encourage and nurture the growth of companies. That is
the object of the
Bill. The Bill should
not provide anybody—we have been conscious on many occasions of
a difficulty in this context—with opportunities for greenmail or
blackmail or to exert pressure to prevent people from doing what they
seek to do in good faith and in their own rational business interests.
It should not provide them with some toehold in the law that enables
them subsequently to claim money from people engaged in ordinary
business in good faith. We do not want the measures to form a basis for
greenmail or blackmail, and we do not want to give creditors the
opportunity vexatiously, perversely or exploitatively to prevent
companies from changing their status. That is common
ground. This is where
the Minister and I disagree. We do not want to solve the problem by
creating a worse one. Above all, we do not want to create a situation
in which companies are needlessly put into or threatened with
insolvency. This is my central response to her: I do not believe that
the insolvency rules are the right answer to my question. Nor do I
think that a three-year carry-over—I shall use that word rather
than the term “grace period”—of unlimited
liability is adequate for
the simple reason that three years is entirely arbitrary. Some of a
company’s liabilities will be for longer than three
years. Equally, it
does not make any sense to protect new creditors—that is,
creditors who contract with a company after the company has changed its
status to limited liability—which would not normally be
available to the creditors of a company with limited liability. Three
years does not make any sense for either group of creditors: those who
are contracted with the company concerned before the change of status
or those who contract with the company after the change of status or
during the first three years.
It seems to me that the simple
answer is to say that a company cannot change retrospectively its
relationship with a creditor by changing its status as a company,
changing the basis on which its suppliers, lenders or other creditors
will deal with it in future. That answer would be fair, transparent and
in accordance with a common-or-garden understanding of how things work.
It should not be possible for shareholders, simply by changing the
status of the company, to protect themselves against any liability that
they find onerous or threatening to their private wealth outside the
paid-in capital of the company in which they have
invested. I shall give
some simple examples. There might well be a company with a net worth
of, let us say, £1 million and liabilities of £4 million.
That is quite a high leverage but creditors and suppliers may well be
happy with it because they know that the shareholders are people of
substance. They probably do not know their exact net worth but they
know that it is many tens of millions of pounds. They therefore feel
totally relaxed dealing with a company on that basis and they might
enter long-term contractual lending arrangements with the
company. Then
suddenly one day the company announces that it will change its status.
Immediately the credit quality of all the assets in the hands of the
creditors deteriorates markedly. The creditors may then have worries
about their claims on the company once it has changed its status. There
would then only be a net worth of £1 million of assets securing
their claims of £4 million. Some deterioration in the
company’s position could then make their claims worthless or
discountable. In those circumstances, under the Minister’s
proposed arrangements, the creditors would have some protection for
three years. After that they would not, and they would be completely
done for. It may well
be that people outside the Committee following our debates will ensure
that they are thoroughly protected against such a possibility in
whatever contractual or lending arrangement they enter and ensure that
there is a contractual possibility of winding up a company in the event
of its changing its status. That is an enormously heavy-handed type of
protection to have to propose. We want protection that is fair and
deals only with the liabilities incurred by a company before its change
of status. It should also be unlimited in time, because any arbitrary
limit would not cover longer-term contractual or lending
arrangements. I have
set out the problem at slightly greater length than I intended. I hope
that, rather than expect me to send her a copy of Hansard, the
Minister will take my
oral communication as an invitation to re-examine the matter and to see
whether she can return with a better
solution. David
Howarth: Having listened to the debate, I believe that it
comes down to how one sees the original deal between and unlimited
company and the person who enters a contract with it. There is a
sophisticated view of such a contract that the person lending the money
does so on the basis of the specific provisions of company law and
those in the 1986 Act. The answer to complaints would therefore be,
“Well, you contracted on the basis of the existing statute
law.” The powerful objection to that view is that it is too
sophisticated a way to consider the contract for an ordinary person
making a deal with a company to be forced to follow and that in reality
nobody makes contracts on such a basis. Under such a view, we would
require anyone dealing with unlimited companies to take sophisticated
legal advice to allow them do so
safely. The other
equally absolutist view of such contracts is the one expressed in the
amendment—that they are agreed between the lender and the
company on the basis that the company is unlimited. A change in the
company’s status, from unlimited to limited, is, in a sense, a
breach of that agreement, changing the basis on which the agreement is
reached by the
creditor.
3.15
pm That absolutist
view gives rise to the drafting of the amendment, which I concede would
put a veto power into the hands of the creditor. If one wanted to
defend that approach, one could say that the contract was like any
other contract, and that a person who enters into a contract with
somebody else has a veto in the sense that the other side is not
allowed to change their promise unless that person says so and gives
them permission. I
accept that the view expressed by most hon. Members today has been a
third view of the contract, which is that the parties agree on the
basis that the company is an unlimited company, but that each side also
allows the other reasonable leeway to change their status or basis of
the deal, given ordinary commercial developments, including the desire
of a company to go public, for
example. Given that
that seems to be the most widespread view in the Committee, it seems
that the best thing for me to do is ask leave to withdraw the amendment
in its present form, but reserve the right to return on Report with an
amendment that does not follow the other absolutist view of the
contract, which appears to be the Government’s
view.
Mr.
Davies: On a point of order, Mr. Illsley. I believe that
we have made some progress this afternoon in clarifying the issue. In
the light of the hon. Gentleman’s comments and his reference to
a third way and to coming back on Report, my inclination is also to
come back on Report with a third way enshrined in the form of a proper
amendment. Would it be normal practice for such an amendment to be at
least deemed acceptable—I cannot ask you to undertake to ensure
that it is accepted—and therefore potentially debatable
on Report, even though it would cover a point that we had debated
extensively in Committee? Such an amendment could advance a solution
that we have not been able to debate concretely, because we have not
had the opportunity to table an appropriate amendment or new clause in
Committee.
The
Chairman: It would be for the Speaker to determine whether
that was acceptable. The question is hypothetical, so it is difficult
to make a decision, but I take on board the hon. Gentleman’s
point, and we will provide him with some advice privately before the
end of the Committee stage to clarify the issue. I hope that that deals
with his point of
order.
David
Howarth: On that basis, I beg to ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
Clause 105 ordered to stand
part of the
Bill. Clause
106 ordered to stand part of the
Bill.
Clause
107Issue
of certificate of incorporation on
re-registration Question
proposed, That the clause stand part ofthe
Bill.
The
Chairman: With this it will be convenient to discuss
Government new clause 5— Statement of capital required where
company already has share
capital.
Margaret
Hodge: An issue arises here that we said we would return
to following Report in the Lords, when we amended the Bill to remove
the requirement for a statement of capital to be provided where an
unlimited company that has not previously had a share capital
re-registers as a company limited by shares. The requirement for a
statement of capital was considered unnecessary in those circumstances,
as the company will be required to make a return of allotments to the
registrar under clause 545 when it makes an allotment of shares after
its registration. That return must be accompanied by a statement of
capital. In short, we removed the potential duplication of an
information
requirement. We
indicated then that we might need to return to the question of whether
there were any circumstances in which an unlimited company should be
required to provide a statement of capital on its re-registration as a
limited company. The amendment is the outcome of our deliberations on
that point. The new
clause requires unlimited companies that already have a share capital
at the date of application for re-registration as limited to deliver a
statement of capital to the registrar within 15 days of their
re-registration as a limited company unless that information has
already been provided in some other way.
The amendment is required to
ensure consistency of treatment between companies that are already
limited by shares on the one hand and unlimited companies having a
share capital that re-registers companies
limited by shares on the other hand. Companies limited by shares are
required to file a statement of capital whenever they make an
alteration to their share capital which affects their total subscribed
capital and whenever they make a new allotment of shares. In other
words, they are effectively required to keep the publicly accessible
statement of capital up to
date. By contrast,
unlimited companies that have a share capital are not subject to the
same requirements for real-time reporting, so to speak, of their
capital base. Instead, they must provide a statement of capital once a
year with their annual return. That means that there is often a time
lag. For example, the share capital information on an unlimited company
with a share capital that provides an annual statement in January,
allots new shares in July and re-registers as a company limited by
shares in December, will be many months out of date when the company
re-registers. One
option for addressing that difference would be to require all unlimited
companies with a share capital to make statements of capital on the
same basis as companies limited by shares. That seems an unnecessary
burden.
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